1998 Third Quarter Report to Shareholders
Although earnings of $287 million were down $8 million or 2.7 per cent from the strong third quarter of 1997, we made further progress in building our businesses and achieved market share gains in key areas. We also took advantage of strong capital markets during the quarter to take special security gains of $200 million, which we are using to boost general reserves in keeping with higher regulatory goals for our industry.
We believe this progress confirms the ability of our exceptional people to remain focused on "business as usual" during a time of accelerating change. It also confirms that we are on the right strategic course in terms of repositioning our branch banking network and investing in wealth management and securities businesses.
highlights of the third quarter:
O u t l o o k : Signs of slower-than-anticipated economic growth in Canada – along with the recent decline in the Canadian dollar, lower commodity prices and continued economic problems in Asia – have tempered our outlook for the fourth quarter and into the next fiscal year. These economic developments have reinforced our commitment to diversifying our markets and businesses in an effort to build shareholder value. We believe we are on course to sustain a good performance in fiscal 1998.
Toronto, August 27, 1998
Personal loans, residential mortgages (including securitizations), and commercial loans and bankers' acceptances continued to show strong growth of 21%, 10% and 11% respectively. This was partly offset as margins declined due to increases in short-term market interest rates causing a further flattening of the yield curve, which largely eliminated earnings on the interest rate gap position. Other income grew by $10 million or 5%, in part due to fees generated by increased activity related to mortgage securitization, and borrowings by our commercial customers.
Compared to the prior quarter, net income increased by $6 million primarily due to good growth in net interest and other income caused partly by the effect of three more days in the quarter. Return on equity fell by one percentage point to 17% as common equity allocated to the segment increased by 15%.
Net income declined $1 million or 2% from the prior quarter. Brokerage volumes increased in Waterhouse in part due to the addition of Jack White, effective from the end of May, but slightly contracted in Canada in line with less active markets. Green Line Australia results reflected the one-time costs of rebranding. Mutual fund management fees increased 17% from the prior quarter reflecting growth in assets under management and the longer quarter.
Investment Banking has continued to show strength in fixed income and interest rate products. The high yield business based in New York made particularly impressive gains and its revenue was more than double that of a year ago. TD Securities was the top ranked Canadian firm in the U.S. market for high yield underwriting during the second calendar quarter of 1998. Merchant banking and credit derivatives showed strong revenue growth from a year ago.
The segment's return on equity improved significantly, as the increased net income caused by the special security gains more than offset an increased capital allocation reflecting the growth of this segment over last year.
After adjusting for the special security gains, both net income and return on equity are below the levels reported last quarter due to sharply lower trading revenue as the world's equity markets fell from the highs set earlier in the year.
In the U.S., TD's syndication business earned record fees during the quarter as a result of several large deals. Overall, syndication revenue increased by 84% from last year. Net interest income for the segment increased by 21% as the average earning assets grew by 19% and margins improved. The segment also benefited from improved margins in its trade finance and corporate cash management businesses.
Net income improved slightly from last quarter while return on equity increased by one percentage point mostly due to the decreased capital requirement, reflecting lower risk-weightings assigned to the Bank's corporate loans.
Earnings per share this quarter were $.93 versus $.96 in the same quarter last year. Return on common equity was 15.0% in the quarter compared to 17.8% a year ago. On a cash basis, return on equity is 17.3% this quarter compared to 19.8% last year.
and provision for credit losses
Excluding this special increase, the full year estimate for the provision for credit losses in 1998 is unchanged from last quarter at $250 million. This amount, which is $90 million higher than last year, is based on establishing the total provision for credit losses at the estimated annual average experience over a credit cycle and is also expected to contribute toward additional general allowances. One quarter, or $63 million, of this full year estimated expense was taken this quarter and, including the special provision, brought the total charge against income to $263 million.
Credit quality continues to be high with net impaired loans of negative $321 million at the end of the quarter. This is $606 million lower than the third quarter last year and reflects the increased level of general allowances and the Bank's continued strong credit performance.
Excluding the special securities gains and despite the volatility in global markets, other income growth continued to be strong increasing $148 million or 23% from the same quarter last year. Investment and securities services, which include our wealth management businesses - Green Line, Waterhouse and Green Line Australia discount brokerages, our full service broker Evergreen, mutual funds and TD Securities, increased $59 million or 22% over last year. Compared to last year, trading activity by our customers at Waterhouse and Evergreen increased by 135% and 17% respectively. In addition, mutual fund revenue this quarter was $16 million or 40% higher than last year as growth in assets under administration in both Canada and the U.S. continued.
In addition, trading income at TD Securities grew $25 million or 34% over last year but declined $58 million or 38% from the very strong second quarter. Credit fees were $18 million or 19% higher than the previous year. Virtually all of this increase is from growth in fees from increased activity by our corporate customers. Card services revenue was $3 million or 9% higher than last year as a result of higher debit and credit card usage.
The Bank’s efficiency ratio improved to 57.8%, including $200 million in special investment securities gains realized during the quarter. Excluding these gains and goodwill amortization, our efficiency ratio was 64.3% this quarter versus 60.4% last year. The main reason for this deterioration is the change in mix of our business. Fee generating businesses, such as wealth management, have efficiency ratios inherently higher than traditional intermediation businesses, such as corporate lending. This quarter, wealth management businesses generated 23% of total revenues, excluding the special securities gains, compared to 16% last year.
Personal non-term deposits increased 14% or $2.8 billion over last year. Waterhouse, which contributed $2.4 billion of this increase, has seen personal deposits more than double over the last year. Partially offsetting the growth in personal non-term deposits was a 4% decline in personal term deposits leading to a 4% or $1.9 billion increase in total personal deposits. Deposits from business and government increased 52% or $31.6 billion over last year in line with the growth in investment banking assets.
Total mutual funds under management at July 31, 1998 were $25.6 billion, an increase of $6.9 billion or 37% from last year. Mutual funds under management in Canada increased $1.6 billion or 12% with Waterhouse mutual funds increasing $5.3 billion or 94%.
The ratio of net common equity to risk-weighted assets at 6.4% as at July 31, 1998 is 20 basis points higher than at last quarter. We continue to actively manage our risk-weighted assets and capital requirements, including for the first time securitizing credit card receivables. This contributed to total risk-weighted assets declining by $800 million from last quarter to $103 billion. Together with the increase in common equity previously noted, our Tier 1 capital ratio increased 20 basis points to 7.3%. Our total capital ratio increased 50 basis points to 11.2% from last quarter, benefiting from the increased level of general allowances this quarter.